The Benefits of Blockchain in the Banking Industry – Part 3

Posted on March 01, 2019

By Natalie Lord

The banking industry has the potential to be significantly reinvigorated by the changes that blockchain technology can offer. In the past couple of weeks we’ve looked specifically at how it could impact the payments and clearance and settlement systems, and how it could transform the fundraising arena and the securities market. This week we look at how implementing the technology could rejuvenate loans and credit protocol and trade finance.

With loans and credit, blockchain technology affords a more secure way
of offering personal loans to a larger group on consumers. It also reduces the
cost overheads of the loan process, makes the system more efficient and offers
more security than is currently available.

At
present, traditional banks and lenders underwrite loans on a system of credit
reporting. However, blockchain technology enables peer-to-peer loans and
complex programmed loans that can function similarly to a mortgage or
syndicated loan structure. They can be set up much faster than the traditional
loan process and offer a greater level of security.

If you want to take out a loan now, you fill out an application form and
the bank will then evaluate the risk of you not repaying it. To do this they
look at factors like your credit score, your home ownership status and your
debt-to-income ratio. They access this information through one of three major
credit agencies: Experian, Equifax or TransUnion. Based on that information,
banks then assess the risk of you defaulting into the fees and interest
collected on the loans.

This system isn’t particularly friendly to consumers. Many people have
errors on their credit score which will affect their ability to get a loan.
Further, having detailed, personal information stored across three different
institutions creates significant vulnerability. Last year Equifax was hacked
and the credit information for more than 145 million Americans was exposed.

Blockchain technology would also allow consumers to apply for loans
based on a global credit score with a cryptographically secure, decentralized
registry of historical payments.

In 2018, the first live securities lending took place with a US$30.48m
transaction between Credit Suisse and ING.

In trade finance, the use of blockchain alongside distributed ledger
technology (DLT) can support cross-border trade transactions that would
otherwise by uneconomical because of costs relating to trade and documentation
processes. Implementing these systems would further reduce paper usage and
delivery times.

At present, between about 80% and 90% of world trade relies on trade
finance. With this statistic in mind, the impact that blockchain technology
could have globally across a number of industries using cross-border trading
would be immense.

The reason that trade finance exists is to ensure that exporters and
importers can engage in international trade, to extend credit and to mitigate
risk. It’s an essential component of the global financial system, yet at the moment
it operates on an antiquated system of manual and written documentation. Until
now, blockchain technology has had an increasing presence in trade programmes,
but its role in credit and bills of lading has only recently started to rise.

Blockchain technology could save importers, exporters and their
financiers billions of dollars every year by streamlining and simplifying the
complex systems in play currently. Physical letters of credit would be a thing
of the past. Companies would be able to securely and digitally prove country of
origin, product, transaction details and any other details necessary. There
would be greater visibility between exporters and importers on shipments moving
through the system and improved assurance of delivery.

Payments between importers and exporters could take place in tokenized
form on receipt of or delivery of goods. Using smart contracts, importers and
exporters could set up rules that would result in automatic payments and eliminate
the possibility of missed, late or repeatedly mortgaged units.

Blockchain technology would also minimise the risk of fraud to trade
parties. At present one of the biggest problems is the same shipment being
mortgaged repeatedly. Under current systems this happens with such regularity
that commodity trade finance banks write it off as a cost of business. Because
it works on an open-ledger basis of transparency with no single control point,
and can hide confidential information like pricing and trade secrets where
necessary, blockchain technology also enables greater trust between parties.

For believers in blockchain technology, the potential for upside is
immense but the technology is still in its infancy and needs perfecting.
Disruption takes time. Some believe that cryptocurrency and blockchain
technology will eventually replace banks altogether. Others think it will
change or supplement traditional financial infrastructure to run more
effectively.

But regardless of the degree of impact, the fact that blockchain technology is going to transform the banking industry is not in debate. That million-dollar question has been answered. The next question is to ask how many millions of dollars blockchain technology will save the banking industry and only time can give us that answer.